solution

Bob and Ron’s Stereo sells televisions and DVD players. They have estimated

the demand for these items and have determined that there are three consumer

types (A, B, and C) of equal number (assume one for simplicity) that

have the following reservation prices for the two products. Bob and Ron’s cost

for a TV is 9 and for a DVD player is 9. It will cost Bob and Ron 18 to produce

a bundle of one TV and one DVD player.

Any consumer’s reservation price for a bundle of one TV and one DVD player

is the sum of their reservation prices for each item. Consumers will demand

(at most) one TV and one DVD player.

a. If Bob and Ron only consider pricing each item separately, pricing a pure

bundle, or pricing a mixed bundle as their pricing policy, what price(s)

would maximize their profit and what would be their profit?

b. If Bob and Ron were able to perfectly price discriminate (that is charge

different prices to different consumers, how much would their profit

increase over their optimal profit in part a?